New BPC report: Federal Estate Tax Supports Public Priorities

The federal estate tax provides billions a year for essential priorities like education, the environment and national security. It’s also the most progressive of federal taxes, applying to only the wealthiest two of every 1,000 estates.

But misconceptions surround the tax. And efforts are afoot in Congress that would weaken it.

The tax has already been steadily weakened since the Bush tax cuts in 2000, as rising exemptions have meant that less of an estate’s value is subject to the tax. In 2000, the exemption was $675,000. Only two of every 100 estates nationally were subject to the tax. The exemption is now $3.5 million for an individual, and only one in every 500 estates across the country owes any tax.

While, the rhetoric is that the estate tax hits the little guy, the reality, according to an analysis by the Tax Policy Center (TPC), is this: only about 110 small farms and busi¬nesses across the country would owe any estate tax in 2011, if the 2009 parameters were made permanent. In Washington State, only two small family farms or businesses would owe any estate tax in 2011, under those parameters.

Now some proposals in Congress would weaken the tax even more. According to an analysis by the Washington State Budget & Policy Center, only the wealthiest estate owners would stand to benefit from a proposal by Senators Blanche Lincoln and John Kyl (along with a similar proposal from Representative Shelley Berkley in the House).

For estates valued at $20 million, it would mean an average tax cut of $3.5 mil¬lion. This would cost the nation $153 billion more in lost revenue and increased interest on the higher national debt than a more fiscally responsible proposal by President Obama.

Read the entire report here:

Income Inequality Grew Steadily from 2002-07

The top one percent of wealthiest households in the U.S. saw almost unprecedented income growth between 2002 and 2007, with income rising ten times faster than it did for the bottom 90 percent of households. As a group, the richest one percent of households saw their incomes grow by 62 percent during this period, after adjusting for inflation. By comparison, the bottom 90 percent of Americans (those with annual incomes below $110,000) experienced income growth of only four percent.

According to a new analysis of IRS data by economists Thomas Piketty and Emmanuel Saez (summarized by CBPP), income growth skewed in favor of the wealthy during the 1920’s, but then turned towards the middle class during the post-WWII era. As the graph below shows, in the early 1980’s income growth again began to concentrate in the upper tiers of American households.



Income gains have been even more pronounced among those at the very top of the income scale. The CBPP report shows that incomes in the top one-tenth of one percent of U.S. households grew by about 94 percent ($3.5 million per household) from 2002 to 2007.

The report does not show the impact of the current economic recession. Even though it is expected that income concentration will fall in 2008-09, once the recovery begins economists predict income inequality trends will continue.

Revenue Implications of Federal Estate Tax Reform

The federal estate tax provides a substantial revenue stream to the government that could be a key source of funding for health care reform, education and drawing down our federal deficit. Paid by only one quarter of one percent of all estates, it is the most progressive of all federal taxes.

Since 2001, revenue from the estate tax has shrunk continuously due to tax cuts instituted by the Bush Administration. According to current law, the federal estate tax is set to expire entirely in 2010 and then resume at 2001 levels the following year. Prior to this happening, it is expected that Congress will pass new legislation that sets a standard exemption level going forward.

In anticipation of the debate, the President has proposed keeping the estate tax within the 2009 parameters. This allows for an individual exemption of $3.5 million and taxes eligible estates at 45 percent. The White House has also proposed indexing the exemption levels for inflation, which would allow the real value of the exemption to be maintained over time.

Not everyone agrees. Others have called for raising the individual exemption to $5 million and lowering the tax rate to 35 percent. But a new paper released by the Center on Budget and Policy Priorities estimates that instituting these parameters would cost the federal government $118 billion* between 2012-2021, when compared to the White House proposal.

Now is not the time to reduce government revenue. Because of the severity of the current recession, the federal government must make major investments to help spur recovery. Any estate tax revenue lost over the next ten years will likely result in other tax increases or significant reductions in key investments. And attempts to offset reductions in the estate tax with other tax increases would represent a tax shift away from the wealthiest families in the country to families with more moderate means.


*This figure includes $91 billion in lost revenue and $27 billion in increased interest payments on the debt.

Federal Estate Tax: Examining the Impact on Small Farms and Businesses in Washington

What is the impact of the federal estate tax on mom and pop shops and small family farms? This question has been central to the debate around changes to estate tax law likely to be taken up by Congress later this year. According to new analysis from the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, only one hundred small farms and businesses across the country would owe any estate taxes in 2011. This would be under President Obama's proposal to freeze the estate tax at 2009 levels ($3.5 million exemption per individual and a 45 percent tax rate).

The Center also did a rough state-by-state analysis using IRS data on estate tax returns filed in 2007 to provide a gauge for how those 100 family-owned farms and businesses would be divided. (This isn’t a perfect measure because the exemption was $2 million in 2007.) What is Washington's share? Assuming a freeze at current levels, roughly two small farms and businesses in Washington State would owe estate tax in 2011.

The Senate Budget Resolution, which was passed on April 2, includes an amendment that would raise the exemption to $5 million per individual and lower the tax rate to 35 percent. Under this proposal, the Tax Policy Center estimates that the number of small businesses and farms would be reduced to 40 nationwide in 2011.

If enacted into law, this policy change would cost the federal government close to $100 billion in lost revenue over ten years.* Any action on the estate tax this year will play an important role in budget considerations because the estate tax provides a substantial revenue stream to the federal government.

*This is an updated figure. See this paper from the Center on Budget and Policy Priorities.

Federal legislation will give a $250 billion tax cut to wealthy estates

Last week during floor debate of the budget resolution, the U.S. Senate narrowly approved a $250 billion reduction in the federal estate tax. While not binding, the vote could set a precedent for the direction that estate tax legislation will take in Congress later this year.

The tax cut came in the form of an amendment to the budget resolution. It was proposed by Senators Lincoln (D, AR) and Kyl (R, AZ) and passed by a 51-48 margin. Washington Senators Patty Murray and Maria Cantwell joined ten other Democrats and Senate Republicans in approving the measure.

Current federal estate tax law allows a $3.5 million exemption for individuals and $7million for couples with a flat tax rate of 45 percent (although the average effective rate is much lower at 16.5 percent*). At this level, only three in every one thousand estates owe federal taxes. President Obama and the House of Representatives both called for freezing the estate tax at 2009 levels in their budget proposals.

The Lincoln-Kyl amendment increases the estate tax exemption to $10 million per couple and $5 million per individual with a lower rate of 35 percent. Over ten years, it would result in $250 billion in lost revenue for the federal government.

*Source: Tax Policy Center